Allan Goldstein, CLU, ChFC, RHU, TEP 
Terry Navarro, CPA
LONG TERM CARE: CONSIDERATIONS FOR RETIREMENT AND ESTATE PLANNING
The need for care when an individual experiences a chronic health issue continues to increase as the population in the United States ages. This care, often referred to as Long-Term Care (LTC), exists in many forms - from homemaker services and adult day care, to assisted living facilities and nursing homes. At age 65, there is a 70% chance of needing LTC in the future.1 A recent Pew Research Center survey found that for individuals aged 40-59, of those with at least one parent age 80 or older, nearly half (46%) have a parent who needs care.2 And those with parents younger than 80, 19% say the same.

The impact of care can be significant. Proper planning is advised for individuals nearing retirement, and for those who are still in the wealth accumulation phase of their life. Financially, the cost of care can catch one off guard, particularly those who have not planned ahead. The 2013 Genworth Cost of Care study shows the national average can range from $18 per hour for Licensed Homemaker Services, to more than $80,000 per year for a private room at a nursing home.3 Care provided from any type of service will last three years on average, potentially costing a family several hundred thousand dollars for care at a top-tier facility. Additionally, the emotional burden of seeing a loved one in need can be difficult to manage.

Affluent individuals often prefer to self-insure this risk, but there are drawbacks to take into consideration, whether the individual is a baby boomer or a millennial.

Most overlook the fact that income, not assets, is needed to pay for care. As a result, an individual's current retirement income may not be enough to support their everyday lifestyle as well as specialized care for their partner. There are also potential asset liquidation costs to consider, such as tax issues and market timing. This may, in turn, further erode the principal generating income. The original intent may have been to pass these funds on to children, used to pay for the grandchildren's education expenses, or earmarked as a charitable donation.

Many may also underestimate the cost of care escalating more quickly than investment returns. Also referred to as the sandwich generation, caregivers may have concerns of balancing their parents increasing need for care while also raising their own children. Additionally, the unexpected loss of a spouse, who may have intended on providing care, can impact plans for the surviving spouse. As medical technologies continue to develop and advance, contributing to increased life spans, the duration of care needed in the future may also increase.

Many strategies are available to help transfer the risk of and plan for LTC. Of the insurance products available today, affluent individuals are gravitating to hybrid LTC insurance policies as they complement a self-insurance strategy. In a typical hybrid LTC policy, a single premium is used to fund the insurance, although multi-year payment options are available, offering annual payments of three to ten years. Often, the funds for this premium may come from repositioning a current asset earning a low rate of interest, such as a savings account or certificate of deposit, which may be designated as an emergency fund. If LTC is needed, the policy leverages these assets into LTC benefits that may reach as much as 4-6 times the amount of the initial deposit. If benefits are not exhausted by LTC needs during the life of the insured, the policy provides an income tax-free death benefit to heirs.

In addition, many hybrid LTC policies include (or offer for an additional cost) a return of premium benefit as a policy rider. With a return of premium benefit, the policyowner is allowed to surrender the policy at any time and recover their initial premium, upon request. Policies may also provide Care Manager Services to help the family of the insured find the best and most appropriate care for their specific situation.

Once the premium is fully paid, benefits are guaranteed; another plus with clients and advisors alike. This provides protection against future rate increases. The policy also remains an asset on the balance sheet, and there is no "use it or lose it" risk with the death benefit and return of premium options offered. In a corporate setting, an executive group may also consider grossing-up (or offering a bonus to) an executive or a key employee's pay to then allocate those funds to purchase a policy.

LTC should not be overlooked as a component of comprehensive retirement and estate planning. A thorough discussion should involve both spouses and include an in-depth review of family history to determine one's likelihood of requiring advanced care. Moreover, planning is necessary to identify how such care will be managed and paid.

 

Endnotes

 

1U.S. Department of Health and Human Services.

2Pew Research Social & Demographic Trends, "The Sandwich Generation," January 30, 2013.

3Genworth 2013 Cost of Care Survey, Tenth Edition.

 

Goldstein Financial Group, LLC is an M Financial Group Member Firm in Deerfield, Illinois. 
Allan Goldstein is President and Chief Executive Officer and can be reached at [email protected] or 847.272.2500 ext. 201. 
Terry Navarro is Vice President and can be reached at: [email protected] or 847.272.2500 ext. 214.

April 2014  

 

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